A family member’s passing is always a difficult experience. In many cases, the person who passed away may have been a homeowner. This person may have taken steps to pass on their assets to beneficiaries, such as their children or other close relatives. If a home is one of those assets, it can create a complicated situation for the beneficiaries.
There are several ways for a homeowner to pass their property to a family member upon their death. They could name the beneficiaries in their will, or they could place the home in a trust.
What is a Trust?
A trust is a legal arrangement in which a trustee manages assets for the benefit of beneficiaries. Living trusts can be used to entrust certain assets to a trustee while the holder is still alive but unable to make decisions. In most cases, trusts facilitate simpler transfers of assets to the deceased individual’s beneficiaries.
These can include money, investments, and even a house. The trustee is legally obligated to follow the trust agreement and protect the interests of the grantor and beneficiaries.
Types of Trusts
The two primary types of trusts are revocable and irrevocable. In revocable trusts, the terms of the agreement can be changed if certain processes are followed. For example, a revocable living trust can be adjusted by family members with specific rights.
An irrevocable trust cannot have its terms changed except in particular circumstances laid out in the agreement document. Home sale proceeds made in irrevocable trusts must be put into the trust and not be used for any other purpose.
Holding Real Estate in a Trust
Homeowners commonly include real estate properties in trust documents. The main reason is to simplify the process of passing assets onto their beneficiaries if they pass away. Here are a few situations where placing a house in a trust is a viable solution.
Avoiding Probate
Probate is the process used to distribute assets after an individual’s passing. The probate process involves many legal complexities and can take a long time, so beneficiaries may be forced to wait to receive what they are owed. Probate also consists of a lot of taxation, so the benefits can be significantly reduced even if the assets are named in the person’s will.
Placing a house in a revocable or irrevocable trust can avoid probate when passing the home to a beneficiary.
Protecting Assets
A trust also protects a person’s assets when they die. In many cases, creditors may attempt to stake a claim on a property, or a legal challenge will impact who gets the proceeds from a home sale. If the homeowner put the house in a trust before they died, the trustee can protect this asset from third parties that will attempt to claim it.
The trustee is obligated to follow the instructions in the trust documents, which include protecting the beneficiaries’ assets.
Estate Planning and Beneficiary Designations
Estate planning is essential when considering how you want your assets to be handled when you pass away. If you leave no trust or will behind, your assets could end up in the hands of the government, leaving your family members out to dry.
If you place your house in a trust, whether irrevocable or revocable, the trustee will ensure your designated beneficiaries receive what they are owed. A smooth transfer will make it easier for your beneficiaries to acquire your assets and use them how they see fit.
Selling a House Held in a Trust
Selling a house in a trust is more complex than a traditional sale. Typically, homeowners work with a real estate agent to facilitate the process, but in this case, the responsibility will fall to a trustee. Here are a few details that make selling property in a trust unique.
The Role of the Trustee
The trustee plays an essential role when it is time to sell trust assets. They have a fiduciary duty to act in the best interests of the beneficiaries, which means selling the home for as much money as possible to benefit them. They are also obligated to follow the trust document instructions regarding the sale and the distribution of the proceeds.
When selling a house in a trust, the trustee must obtain certain permissions or approvals according to the trust agreement. Required approvals may include consent from the beneficiaries themselves or a court to go forward with the property sale. The approval process depends on the terms of the trust agreement.
The Sales Process
Once the trustee’s role is sorted and all necessary permissions are acquired, they can begin selling a house.
First, they may hire a real estate agent to help facilitate the process, assess fair market value, and seek out buyers. The trust-owned property will be advertised by the agent and listed on a multiple listing service. Real estate agents will also schedule open houses or individual visits.
Once offers start coming in for the trust property, the trustee is responsible for negotiating them to get the best possible deal for the beneficiaries. Finally, the trustee will close the sale and sign all necessary documents to follow the grantor’s wishes.
Distribution of Proceeds
When selling property held in a trust, the next step is distributing the proceeds from the sale. This responsibility falls on the trustee’s shoulders. Trust sales are complicated because of this extra step, but the terms of the trust should clarify the situation.
Following Trust Instructions
When selling a house in a trust and distributing the proceeds, the trustee prioritizes following the agreement’s instructions. The terms in the trust document regarding profit from the sale will determine whether the money is to be distributed to beneficiaries or kept in the irrevocable trust.
Beneficiary Designations and Shares
Trust documents should outline who the beneficiaries are and how the proceeds should be divided among them. For example, the spouse may receive a larger portion of the money upon the grantor’s death, while the children receive a smaller percentage according to the trust’s terms.
Potential Tax Consequences
Taxes when selling a house make everything far more complicated. Selling a home in a trust may still be subject to paying capital gains tax, estate taxes, an inheritance tax depending on the state, and other tax implications.
These tax considerations can be difficult to understand, especially since laws vary from state to state. Consulting a tax professional can help you know the capital gains tax owed, the potential tax benefits of selling the trust property, and the current tax laws regarding inherited assets.
In many cases, selling a home in a trust can reduce capital gains taxes if the grantor owned the property for at least a year.
Challenges and Complications
If a house in a trust is being sold, the process is not guaranteed to run smoothly. Various challenges and complications could impact the sale, affecting how the beneficiaries receive the money.
Disputes Among Beneficiaries
The beneficiaries of the home sale could have conflicts about the distribution of proceeds or how the sale should be conducted. In a revocable trust, these disputes may be solved by adjustments to the terms. However, an irrevocable trust would further complicate any conflicts among the beneficiaries.
Breach of Trust by the Trustee
The trustee responsible for selling a house in a revocable or irrevocable trust must adhere to the contract’s terms. If they do not fulfill their duties or mismanage the trust’s assets, the beneficiaries could pursue legal action against them.
Creditor Claims
Creditors want to reclaim the money they are owed when homes are sold. Depending on the nature of the trust, especially if it is a revocable trust, this could complicate the sale and distribution of money.
Make sure you understand the applicable laws in your state regarding creditors that can make claims against trust assets.
Seeking Legal Guidance
Navigating a trust sale is complex whether you are seeking clarification on capital gains tax discounts, estate taxes, an inheritance tax, the proceeds, or the role of the trustee. When in doubt, consider seeking legal guidance from an experienced lawyer. An estate planning attorney, real estate attorney, or tax lawyer could offer valuable insight into the process.
For Trustees
Trustees must avoid breaching their trust contracts. If they are preparing to sell a house and want clarification about the real estate tax implications and legal obligations after the grantor’s death, hiring a lawyer to advise them would be a wise decision.
For Beneficiaries
After the grantor’s passing, beneficiaries should seek legal advice to understand their rights and the trustee’s responsibilities. Most people do not understand enough about trust laws and legal compliance to know if there is wrongdoing, so the guidance of a legal professional can help them navigate a complex situation.
Simplify Your Trust Property Sale!
If you need to sell an inherited house in a trust, speed and convenience are often top priorities. A-List Properties offers a fair cash purchase in 14 days or less, helping simplify a complex situation. To request a no-obligation cash offer on a trust home sale, call 972-526-7042 or complete our contact form.
Zach Shelley
Zach Shelley is a seasoned real estate investor with a diverse network spanning across the nation. As the founder of his own real estate venture, Zach is committed to offering innovative solutions to homeowners facing various real estate challenges.. Through his dedication and strategic approach, Zach continues to make a significant impact in the real estate industry, providing homeowners with alternative pathways to navigate their property transactions.
